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May 19, 2016, Trial News

Kate Halloran

The Consumer Financial Protection Bureau (CFPB) has announced a proposed rule to limit mandatory arbitration clauses prohibiting class actions in consumer financial products and services contracts, including credit cards, bank accounts, and loans. The proposed rule is the result of a study that the bureau conducted at Congress’s behest, and it will prevent companies from inserting in new contracts mandatory arbitration clauses that stop consumers from pursuing class actions. There will be a 90-day comment period on the proposed rule.

The Consumer Financial Protection Bureau (CFPB) has announced a proposed rule to limit mandatory arbitration clauses prohibiting class actions in consumer financial products and services contracts, including credit cards, bank accounts, and loans. The proposed rule is the result of a study that the bureau conducted at Congress’s behest, and it will prevent companies from inserting in new contracts mandatory arbitration clauses that stop consumers from pursuing class actions. There will be a 90-day comment period on the proposed rule after it is published in the Federal Register.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the CFPB to study mandatory arbitration clauses, and it gave the bureau the authority to create regulations to protect consumers in light of the study’s results. The study, which was released in March 2015, gathered empirical data about how mandatory arbitration clauses are used in the financial marketplace; it reported on how frequently the clauses are used, consumers’ understanding of the clauses, and the different procedural rules that apply to arbitration proceedings. The study also collected data on the number of individual, class action, and public enforcement arbitration cases brought in recent years and the respective recovery for plaintiffs in those cases.

According to the study, most consumers are unaware of the arbitration terms in their contracts and the limits placed on class actions. Few consumers bring individual actions against financial companies; between 2010 and 2012, 1,847 individual disputes were filed with the American Arbitration Association—which administrates most consumer financial product arbitrations—but an average of only 411 each year were filed by consumers alone; the rest were filed by companies or the company and consumer jointly. Between 2008 and 2012, approved class action settlements resulted in more than $2 billion in relief for consumers. And when government enforcement and consumer class actions overlapped, the consumer class actions were filed before the government’s action the majority of the time.

The CFPB contends that class actions are a better vehicle for consumers to get relief than arbitration and that class actions encourage companies to alter their conduct. In a press release posted on May 5, the same day the proposed rule was announced, the CFPB pointed out that the rule would benefit consumers by allowing them their day in court when a company violates their rights. It also noted that holding companies accountable in class actions acts as a deterrent and that the proposed rule would make the individual arbitration process more transparent.

The hearing included a panel representing both sides of the debate over mandatory arbitration clauses. Opponents of mandatory arbitration clauses argue that the arbitration process—which occurs in secret—disadvantages consumers by restricting their access to the courts, is too expensive for individuals to engage in on their own, and often favors companies with more resources and familiarity with the arbitration system.

The proposed rule would not ban all arbitration clauses in contracts within its purview, only those that prevent consumers from initiating or joining a class action. Such contracts with arbitration clauses would need to include language making it clear that the clauses cannot prohibit consumers from exercising their class action rights. Companies subject to the proposed rule also would have to submit claims and awards records to the CFPB for review.

Boston attorney Lauren Barnes said that the proposed rule is a good step toward protecting consumers. “The prevalence of forced arbitration clauses with class action bans has caused courts to dismiss countless cases over the years—and caused consumers not to file countless others. This proposed rule allows consumers as a group to once again challenge unfair or fraudulent practices involving consumer financial services, including banking, credit cards, loans, and debt collection. It doesn’t touch everything, but it’s a great start.”

Barnes noted that by allowing class actions, the proposed rule will provide consumers with a fair and transparent dispute resolution process. “Prohibiting bans on class actions, as the CFPB’s proposed rule does, helps alleviate the issues with arbitration clauses. Allowing consumers to prosecute actions jointly enables them to bring small disputes before a neutral decision-maker, bound by the law and the rules of civil procedure and evidence; shine some sunlight on ill practices; and potentially force a company to change its ways.”